The Bundesbank raised its growth forecasts for Europe's largest economy as domestic spending benefits from low unemployment and a boost in earnings.

The Frankfurt-based central bank lifted its projection for 2013 to “no more than” 0.5 per cent expansion from the 0.3 per cent predicted in June. It sees growth of 1.7 per cent in 2014, up from 1.5 per cent, and 2 per cent in 2015.

"The German economy is in good shape: the unemployment rate is low, employment is rising, and wage growth is returning to normal," Bundesbank president Jens Weidmann said in a statement. "These factors are supporting private consumption and driving housing construction," he said, adding that "there should, however, also be a pick-up in exports and, in their wake, an upturn in corporate investment and imports."

Germany has driven growth in the 17-nation euro region as countries from Italy to Greece struggle to emerge from recession. The European Central Bank held its benchmark interest rate at a record low of 0.25 per cent yesterday after a surprise cut in November.

After economic expansion slowed to 0.3 percent in the three months through September, “growth in the German economy will be fairly strong in the final quarter of 2013 and the first quarter of 2014 provided that it is not slowed down temporarily by especially bad weather,” the Bundesbank said. “Over the medium term, the German economy should benefit not only from the rebound in global economic growth but also from the fact that the European economy is increasingly regaining its footing.”

The ECB forecasts the 17-nation euro economy will contract 0.4 per cent this year, unchanged from its September forecast. It will expand 1.1 per cent in 2014 and 1.5 per cent in 2015. Previously, the ECB predicted 1 per cent growth next year. Inflation will average 1.1 per cent in 2014, 0.2 percentage point lower than projected in September, the ECB said. It sees inflation at 1.3 per cent in 2015, the first time it has made a forecast for that year.

The Bundesbank kept its inflation forecast for this year unchanged at 1.6 percent. It cut its 2014 projection to 1.3 per cent from the 1.5 per cent predicted in June and sees annual price gains averaging 1.5 per cent in 2015.

Bloomberg